Finally, Bernanke claimed that “the growth fundamentals of the
United States do not appear to have been permanently altered by
the shocks of the past four years.”

Frankly, I do not understand how Bernanke can say any of these
things right now.

If he and the rest of the Federal Open Market Committee thought
that the projected growth of nominal spending in the US was on an
appropriate recovery path two months ago, they cannot believe
that today. Two months of bad economic news, coupled with asset
markets’ severe revaluations of the future – which also cause
slower future growth, as falling asset prices lead firms to scale
back investment – mean that a policy that was appropriate just 60
days ago is much too austere today.

But let me focus on Bernanke’s fourth statement. Even if we
project a relatively rapid economic recovery, by the time this
lesser depression is over, the US will have experienced an
investment shortfall of at least $4 trillion. Until that
investment shortfall is made up, the missing capital will serve
to depress the level of real GDP in the US by two full percentage
points. America’s growth trajectory will be 2% below what it
would have been had the financial crisis been successfully
finessed and the lesser depression avoided.

There is more: state and local budget-cutting has slowed
America’s pace of investment in human capital and infrastructure,
adding a third percentage point to the downward shift in the
country’s long-term growth trajectory.

After the Great Depression of the 1930’s, the vast wave of
investment in industrial capacity during World War II made up the
shortfall of the lost decade. As a result, the Depression did not
cast a shadow on future growth – or, rather, the shadow was
overwhelmed by the blinding floodlights of five years of
mobilization for total war against Nazi Germany and Imperial
Japan.

There is no analogous set of floodlights being deployed to erase
the shadow that is currently being cast by the lesser depression.
On the contrary, the shadow is lengthening with each passing day,
owing to the absence of effective policies to get the flow of
economy-wide nominal spending back on its previous track.

Moreover, there is an additional source of drag. A powerful
factor that diminished perceived risk and encouraged investment
and enterprise in the post-WWII era was the so-called “Roosevelt
put.” Industrial-country governments all around the world now
took fighting depression to be their first and highest economic
priority, so that savers and businesses had no reason to worry
that the hard times that followed 1873, 1884, or 1929 would
return.

That is no longer true. The world in the future will be a riskier
place than we thought it was – not because government will no
longer offer guarantees that it should never have offered in the
first place, but rather because the real risk that one’s
customers might vanish in a prolonged depression is back.

I do not know by how much this extra risk will impede the growth
of the US and global economies. A back-of-the-envelope estimate
suggests that a five-year lesser depression every 50 years that
pushes the economy an extra 10% below its potential would reduce
average investment returns and retard private investment by
enough to shave two-tenths of a percentage point from economic
growth every year. As a result, America would not just end this
episode 3% poorer than it might have been; the gap would grow –
to 7% by 2035 and 11% by 2055.

This is the shape of things to come if steps are not taken now to
recover rapidly from this lesser depression, and then to
implement policies to boost private capital, infrastructure, and
education investment back up to trend. Perhaps that would be
enough to reassure everyone that policymakers’ current
acquiescence in a prolonged slump was a horrible mistake that
will not be repeated.